Why did RBI make the dispute public?

I had written my MINT column on the speech by Viral Acharya on Saturday in Mumbai wherein he had teased, taunted and dared the government to undermine RBI independence, warning that the financial market dogs would ferociously leap on it, if it dared to do so. It was way over the top. Plus, independence is not just about independence from the political executive but also from financial market interests. Most global central banks are captured by finance.

Someone formerly associate with RBI liked the last line of my column but said that the RBI might have been pushed into a corner. I still think that a public fight does both of them no good and that country is the loser. Therefore, the country is the loser. Someone has to be wiser and  more mature and rise above their egos and turf issues and patiently whittle down the resistance.

But, that said, the government has made tactical errors. It has failed to realise that it simply cannot emerge the winner in a public battle with the central bank. That is probably the reason why Viral Acharya took it public, at the behest of the Governor, perhaps.

The optics are simply not in favour of the government. It will be seen always as a bully, abusing its powers, for its short-term political gains, riding roughshod over innocent professionals, with no political axe to grind, quietly performing national service and taking care of the country’s long-term interests. It is an unequal battle and public sentiment will seldom be on the side of the bully.

OF course, it is more so in the case of the suited-booted folks who would always come down on the side of ‘people like ’em’. There again, the government will lose in the battle for the affection of the so-called ‘opinion-makers’.

The Congress Party had internalised it very well. They were sophisticated. Their pressures were silent and subterranean. Remember what Rakesh Mohan wrote in ‘Business Standard’. I had blogged on it. He said that the number of government nominees on the Board was increased in 2012 when Department of Economic Affairs was split and the Department of Financial Services was created. It did not have a discussion in Parliament. I mention it in the MINT column too.

Then, there are substantive issues. By no stretch of imagination can it be said that there is no bad debt problem in India and that it is the concoction of RBI by its reckless application of Basel norms.  It won’t fly anywhere. The evidence is overwhelmingly against such an outrageous claim.

Second, if the government claims that it is the world’s fastest growing large economy, why is it worried about liquidity tightness?

Third, the government should actually be working with RBI quietly and even claiming that it is sacrificing short-term political gains for the long-term by pushing for the culture of bad, reckless and ill-judged lending by public sector banks, to end. Thus, it should back ‘prompt corrective action’ and make a virtue out of it.

This is what I said in my BloombergQuint interview and they had misrepresented it in the headline but got the bullet points mostly right:

Government Can Use RBI As A Shield, Says V Anantha Nageswaran

The government is using the central bank as a shield to get reforms in place,

(I said: the government should use RBI as a shield – fire from behind them, sort of, and use it as a bulwark to make the long-term case) instead of using it as a bulwark to make the case for long-term priorities, said V Anantha Nageswaran, the dean of IFMR Business School (Krea University).

  • Pressure on the RBI must be very high for Viral Acharya to have made the speech
  • Benefit of doubt will always go to central bankers, and not to political leaders
  • There’s a way to guide the central bank with finesse, without creating a crisis
  • The real issue with RBI’s reserves
  • The government wants comfort on fiscal deficit, RBI wants to maintain sufficient reserves
  • Government should be using the RBI as a bulwark to make the case for long-term priorities
  • In fact, the government can use RBI as a shield, to get reforms done
  • There are issues to reflect on from the RBI’s point of view
  • Obvious that both sides should react with more maturity [Link]

Fourth, regardless of whether the RBI has excess reserves, it cannot be returned to the government through a public dispute and through fractious Board meetings. Softly, softly has to be the approach. Having battering rams in the Board won’t help but hurt the image, hurt the currency and hurt the bond price, handing a defeat to the government in more ways than one.

All this being said, I liked the pieces by Mythili Bhusnurmath, by Saugata Ghosh and T.T. Rammohan on the ongoing dispute.

But, I think I have understood why RBI brought the issue to the public, no matter how bad it is for the national image. The government cannot win in a public battle because a public battle is a perception battle. The government has to show finesse and sophistication. But, those are two more of the deficits of this government – along with talent – and, come to think of it, they could be India’s deficits too.

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